Credit Requirements for FHA Loans in 2021

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If you’re looking to buy a home, Intended for people with lower credit scores and less cash for a down payment, FHA loans are a popular pathway to first-time homeownership.

What Is an FHA loan?

An FHA loan is a mortgage backed by the Federal Housing Administration (FHA), a division of the U.S. Department of Housing and Urban Development (HUD). FHA loans differ from conventional mortgages in their accessibility. Popular with first-time homebuyers, these loans are intended to make homeownership more achievable through lenient credit standards and lower down payments. 

With an FHA loan, you can purchase a single-family home, two-to-four unit homes, or individual condominium unit under 15- and 30-year terms. FHA loans are originated by FHA-approved banks, credit unions, and online lenders, rather than through the agency itself.

Pro Tip

If you’re a first-time homebuyer, you may be eligible for down payment and closing cost assistance programs in your state.

What Is the Lowest Possible Credit Score I Need to Get an FHA Loan?

The minimum FICO credit score for an FHA loan is 500 — but that comes with a bigger down payment.

If you have a credit score between 500 and 579, you need to provide at least a 10% down payment. With a credit score of 580 and above, you’re required to put down only 3.5%.

Why It’s Harder to Get an FHA Loan During the Pandemic

Fair warning: FHA requirements aren’t the only criteria you have to meet. 

Though they are backed by the FHA, these loans are still processed by private lenders, and those lenders have their own sets of eligibility standards. So you may need to have a higher credit score than the FHA minimum to get approved for a mortgage.

The FHA lending market has become more competitive since the COVID-19 outbreaks began in 2020. As unemployment increased, people turned to FHA loans in droves because of historically low mortgage rates and the FHA’s relatively lenient requirements. This influx of applications caused lenders to raise qualification standards. 

Anthony Grech, senior mortgage loan originator at Luxury Mortgage Corp, says he’s noticed FHA lenders increase their minimums to 620 and even 640. Industry-wide, the median credit score for a completed mortgage (conventional and government-backed) increased from 741 in February to 764 in October, according to the Urban Institute

As a result, it may be more challenging for people with “poor” or “fair” credit scores to qualify for an FHA loan. And even if you can get approved, the interest rates will be higher for you than for borrowers with excellent credit. You’ll have to apply for loans with multiple lenders to get a true sense of the market and its ability to meet your needs.

Why Do Different Mortgage Lenders Have Different FHA Credit Score Requirements?

Lenders often add what’s called a mortgage overlay (enhanced standards) to the minimum credit score mandated by the FHA. “They do that because banks have different risk factors and make money in different ways,” says Lisa Phillips, real estate investor and author of Investing in Rental Properties for Beginners

“When you go to big banks that are making money off their derivatives and options, they’re really more conservative and they’re not really making money upfront on these 3% to 4% [APR] home loans,” Phillips continues. Therefore, some banks don’t have incentive to originate loans for borrowers with borderline credit or low down payments, and that’s why their credit score minimums end up higher.

What Else to Know About FHA Loan Requirements

It’s not just the credit score requirement you need to meet. Lenders look at three main factors when evaluating a borrower, according to Grech. 

The first is credit, which includes your existing debts and monthly payments, credit score, and whether you’ve had a foreclosure or bankruptcy before. 

The second is income. “What they’re looking for is stability in your job,” Grech says. “They usually like to see you in your job at least a year or two, and they look at how much you make, which dictates how much of a house payment you can afford.”

The third is where your down payment money comes from. “Is it going to come from money you have saved up? A gift? A 401(k) loan or stock?” Grech says. Lenders and brokers tend to favor personal savings over gifts. “It’s not often that it makes the difference between an approval and a denial, but if there are other risk factors present such as a low credit score, high debt-to-income ratios, or derogatory credit events, we do occasionally see it factor in,” he says.

Check out the full list of FHA requirements, which include rules for debt-to-income ratio, down payments, the property, and much more.

How to Boost Your Credit Score to Meet FHA Loan Requirements

“Before anybody goes to apply for a mortgage, you should know everything about your credit score,” says Cynthia Meyer, CFP, real estate investor, and founder of fiduciary firm Real Life Planning

A FICO credit score is a calculation using the following factors: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Your credit score will determine not only your eligibility for an FHA loan, but also your interest rate and how big of a down payment you need. To get your credit score in tip-top shape, try out the following tips.

1. Report any errors on your credit report

Blemishes, inconsistencies, and fraudulent items should be removed from your credit report immediately. You can do this by reporting an error if you find one. You have a right to contest anything you believe is inaccurate with the three major credit reporting agencies (Equifax, Experian, and TransUnion). 

2. Make on-time payments

Payment history accounts for 35% of your credit score. Lenders will be looking carefully at how diligently you manage your existing loan payments, as it’s the strongest predictor that you’d be able to make your mortgage payments on time. Noticed a payment slipped through the cracks? “If there are any items that are late, you want to get them current right away,” Meyer says.

3. Don’t close your credit cards

If you don’t use a credit card anymore or have just paid off the entire balance, your first instinct may be to close it and never look back. The credit bureaus think otherwise. The longer you hold onto a credit card and use it responsibly, the better you look on your credit report. For any card you don’t intend to use as a primary credit card, charge a monthly bill to it and set the card’s balance to be paid automatically each month. That way you’re reaping the benefits of an old credit card without the hassle.

4. Add utility bills and rent payment history

The most common items on your credit report are students loans, credit cards, mortgages, and personal loans. Optional payments can be factored in too. Meyer says some utility companies and landlords allow you to opt in to the credit bureaus, so each payment is recorded on your credit report. If you make your electric bill and rent on time each month, this is an easy way to potentially boost your credit score by a few points.